The Central Bank of Iran says it will continue to control rates in the interbank market in line with the government’s declared policy to support the capital market.
Interbank rates are under scrutiny of the regulator and in this fiscal year (started in late March) remained in the 21% bracket set earlier by the CBI, head of the CBI Monetary and Credit Affairs said.
“Last year too we did not see sharp fluctuations in interbank rates. The government set a cap of 20% and the average rate hovered around 20.3% throughout the year,” Mohammad Nadali was quoted by IBENA as saying.
In the interbank market only the CBI and commercial lenders are present trading dealing in their excesses and deficits, and resources do not enter the market from outside, nor do resources find their way out of the interbank market, Nadali said.
Interbank rates are interest charged on short-term lending between banks. Banks borrow money from each other to ensure that they have enough liquidity for immediate needs, or lend money when they have excess cash.
Nadali added that the interbank market has not experienced significant see-saws in a way that would impact the share market.
“On the other hand, there is no transfer of resources between these two [interbank and share] markets. So it is not that if rates change in one market resources shift to the other and/or impact two-way rates.
There is no direct correlation between interbank rates and share prices. Other factors are at play,” the senior official said without elaboration.
Stock market officials often voice concern about the harmful effects of high interbank rates on the bourse. This was conveyed in unequivocal terms in July to the CBI boss Ali Salehabadi by the head of the Securities and Exchange Organization (SEO), Majid Eshqi.
Salehabadi pledged to control the rates and underscored the need to align monetary and financial policies.
Added Sensitivity
More recently the share market has shown added sensitivity to interbank rates while financial experts often see a correlation between share prices and interbank rates.
As such, lower rates make investment in shares attractive while higher rates have the opposite effect.
Observers say increase in interbank rates in the past was part of CBI policy to tame runaway inflation. They criticize moves to cut rates with the intention of rescuing the long struggling share market and in the process imposing high and rising inflation.
“Interbank rates are calculated on a daily basis and announced on a special electronic site. The market can show dramatic fluctuations, therefore, central banks define limits as to how low rates can drop or climb. The CBI has been setting a domain of between 14% and 22% for interbank since 2020,” Nadali noted.
He added that the regulator maintains interbank rates within the set domain using repo and reverse repo operations.
Open market operations were launched in early 2020 as part of a CBI measure to reduce banks’ dependence on the CBI, curb inflation and control interbank rates.
As a component of open market operations, repo is a form of short-term borrowing for dealers in government bonds. In case of a repo, a dealer sells government securities to investors, usually with short-term maturities, and buys it back the at the maturity date at slightly higher price.
A reverse repo is a short-term agreement to purchase securities in order to sell them back at a slightly higher price. Repos are typically used to raise short-term capital.
Interbank rates declined in the week to Oct. 22 logging 20.86%. It was 20.9% the week before, ecoiran.com reported.
Iran’s interbank market was established in July 2008 to improve oversight of bank liquidity, facilitate short-term lending among banks, maintain monetary discipline and underpin CBI monetary policies.
